That message sent a chill through Silicon Valley. In the days that followed the meeting, several start-up companies announced layoffs, closely followed by larger companies like eBay and Yahoo, all citing economic conditions in the wake of the financial crisis. So naturally, the meeting and its aftermath got me thinking about what impact our current economic malaise will have upon the e-discovery industry.

If history is any guide, economic downturns lead to more litigation, and more litigation leads to more e-discovery. That’s why e-discovery has often proven to be a counter-cyclical business, and that certainly appears to be the case again now. While traditional technology companies like SAP and Seagate missed their numbers last quarter, the top e-discovery software companies posted strong results. And many lawyers are expecting even better times ahead, if last week’s ACC show or the recent Fulbright & Jaworski 2008 Litigation Trends Survey are any indicator. In particular, the survey results were quite striking, with more than one-third of companies surveyed predicting more lawsuits, and a quarter forecasting more regulatory inquiries. This makes sense in light of the fact that what we are facing is no “normal” recession; rather, it’s a downturn triggered by the sudden and widespread collapse of the banking sector which has left many people wanting legal redress for their grievances.

But, more important than any short-term increase in litigation, I think the real significance of the current crisis is that it will spur a sustained, long-term increase in demand for e-discovery solutions. As revenue growth slows, companies will focus on reducing costs to maintain profit growth. That will prompt many of them to examine the vast amounts of money being spent on e-discovery and accelerate the pace at which they use technology to cut costs by bringing elements of e-discovery in-house. Law firms and litigation support service providers will similarly find their invoices attract greater scrutiny. Their old ways of taking terabytes of data and dumping it into a linear review platform without first removing irrelevant or unresponsive data, will look increasingly profligate.

To learn more about how best to prepare for the coming wave of litigation, and associated increase in e-discovery, I strongly recommend next week’s webinar with Ron Best from Munger, Tolles, and Olson (MTO). Ron is a real innovator in this area, with extensive experience dealing with multi-party, complex litigation. He is also full of practical advice about how best to reign in e-discovery costs and manage with limited resources – skills that will be increasingly important in the coming months.

No industry is an island and, to some extent, we all get impacted by the same economic forces. But the unique thing about the e-discovery industry is that the worst of times can often be the best of times. Consider it a silver lining to the very large cloud hanging over our economy.

A casual observer could be forgiven for seeing the same thing happening in e-discovery. Barely a day goes by without some company in a completely different market announcing that they too now have an “e-discovery solution”. Debra Logan at Gartner, who is fast emerging as one of the leading lights of the e-discovery world, tells me she is speaking to 30 vendors for her forthcoming research – and could easily have covered twice that number. Brian Babinau, the insightful and witty analyst at Enterprise Strategy Group, jokes that: “nowadays, people either build a social networking product or do e-discovery.”

For example, last week Zimbra, an open source email platform which has nothing to do with e-discovery, announced its new “e-discovery features”, which sound a lot like keyword search. Kazeon, which wins the prize for creating the world’s most complex e-discovery workflow diagram, has added e-discovery as one of its primary “solutions”, while Endeca takes a more measured approach, proposing only that its financial services customers use it for e-discovery. The list goes on and on.

Despite the worsening signal-to-noise ratio, all the activity will ultimately make it easier for customers to figure out which e-discovery solution makes sense for them. There’s more coverage from leading analysts, who can help explain the different products; large vendors such as EMC, Symantec, and HP are gradually educating the market; and the industry is coalescing around the Electronic Discovery Reference Model, which breaks e-discovery down into its key elements and explains how they fit together.

If e-discovery follows the path of online video and other fast-growing categories, lots of companies will continue to throw their hat into the ring. But for every hundred “VideoEggs”, there will only be one YouTube.